In January 2013, substantial changes to tax and spending policies are scheduled to take effect under current law. Whether lawmakers allow those policy changes to take effect or alter them will play a crucial role in determining the path of the federal budget over the next decade and the outlook for the economy in the near term and beyond.

If those changes come to pass, they will boost tax revenues and cut spending, yielding a deficit in 2013 almost $500 billion less than the $1.1 trillion shortfall projected for 2012. As shown in the first figure, if current laws governing taxes and spending remain in effect over the next decade (CBO’s baseline projection), debt held by the public will fall from 73 percent of GDP in 2012 to 58 percent of GDP in 2022. In contrast, if policymakers altered those laws to maintain many policies that have been in effect in recent years (CBO’s alternative fiscal scenario), deficits would be much larger and debt would climb to nearly 90 percent of GDP by 2022. (In either case, debt would be relatively high by historical standards.)

In CBO’s judgment, the sharp increases in federal taxes and reductions in federal spending that, under current law, are scheduled to begin in calendar year 2013 are likely to interrupt the recent economic progress, resulting in what will probably be considered a recession That forecast is summarized in the table below.

CBO's Economic Projections for Calendar Years 2012 to 2022 (Under Current Law)

The report contains much more information about both the budget and the economic outlook. Major portions were written by Barry Blom, Christina Hawley Anthony, Charles Whalen, and Amber Marcellino, with assistance from Mark Booth, Jared Brewster, Barbara Edwards, Avi Lerner, Joshua Shakin, and Santiago Vallinas. Many other members of CBO’s staff worked on the projections and other aspects of the report. I consider it a privilege to work with such a talented group and to learn from their collective expertise every day.